There is a tremendous amount of leverage in the business, so large revenue increases are falling to the bottom line vis-a-vis prior periods. Revlimid, which makes up over 60% of total revenue, grew by double digits as well. This is important as it gives investors comforts that Celgene is still a growth company. However, the company had to hike prices in order to do it.
Otezla’s Growth Could Be In For A Structural Decline …
Otezla is used to treat patients with moderate to severe plaque psoriasis. Management admitted Otezla faced headwinds and the company had to offer discounts in the managed care market:
First, while OTEZLA continues to maintain a strong U.S. market position, our 2017 forecast assumptions did not adequately anticipate the deep and persistent slowing growth of the psoriatic arthritis and psoriasis markets, especially during the entire third quarter. When combined with the discounts tied to the execution of our ongoing managed care contracting strategy, we missed our third quarter OTEZLA sales target.
Psoriasis is an $8 billion market expected to generated growth in the mid-single digits. It has also attracted competition. Valeant (VRX) recently launched Siliq at an extremely low price point to gain market share and overcome its black box label. Johnson & Johnson (JNJ) launched Tremfya which is being prescribed by 900 physicians for about 3,000 patients. Though Otezla’s Q3 2017 revenue of $308 million was up 12% Y/Y, it was down 14% compared to the $358 million it generated in Q2 2017.
This is in stark contrast to competing regimens from Norvartis’s (NVS) (NVSEF) Cosentyx, Johnson & Johnson’s (JNJ) Stelara, Eli Lilly’s (LLY) Taltz and Pfizer’s (PFE) Xeljanx. These drugs all grew revenue Y/Y and sequentially. Of the drugs mentioned, Cosentyx ($556 million) and Stelara ($1.1 billion) are the two largest in terms of revenue. Cosentyx has an active ingredient which inhibits the protein (IL-17A) involved in inflammation from triggering an inflammatory response leading to the development of plaque psoriasis. Meanwhile, Stelara blocks IL-12 and IL-23 that may play a role in plaque psoriasis.
Both Stelara and Consentyx continue to grow market share at the expense of competitors. At the end of the day, declining revenue Q/Q appears to be a problem specific to Otezla. Lastly, Otezla is highly important to Celgene. It represents 9% of Celgene’s total revenue, while Stelara is 6% of J&J’s revenue and Cosentx is 4% of Novartis’s total revenue. The others are about 3% of their parent companies’ total revenue.
Now Celgene Is Hiking Prices For Revlimid …
As its second-largest drug faced headwinds Celgene hiked prices for Revlimid and Pomalyst by nearly 20%:
Celgene Corp. has raised the prices of two top cancer drugs again, bringing price increases on the drugs to nearly 20% this year.
The hikes, which went into effect Oct. 19, were made on blockbuster drugs Revlimid and Pomalyst. Both treat the rare blood cancer multiple myeloma, while Revlimid is also approved for several other types of cancer, including another rare blood cancer, mantle cell lymphoma.
For Revlimid, it is the third such hike this year, bringing the therapy’s price to $18,546 per bottle; it is the second hike for Pomalyst this year, bringing the total price to $15,833 per bottle, according to SunTrust Robinson Humphrey analyst Yatin Suneja, who relied on data from information services company Wolters Kluwer.
Management claimed the price hikes were justified because (1) real world outcomes from the drugs were increasing and (2) additional revenue could help fund investment in other clinical trials. Celgene generates $1.2 billion in quarterly EBITDA and has nearly $12 billion in cash and securities on hand. This is more than enough to fund clinical trials.
Celgene has an enterprise value of $85 billion and trades at 17x run-rate EBITDA. Its trading value connotes a growth company, and it must continue to grow revenue by double-digits to justify its share price. I believe Celgene knew it would face headwinds in Otezla, and that given Revlimid’s size ($2 billion in quarterly revenue) its hyper-growth would be difficult to sustain. Sans the price hikes the company would have reported Q3 revenue growth in the single digits and it share price would likely have plummeted.
CELG hit a 52-week low of just under $95 shortly after earnings. It currently trades around $105 and is down 11% Y/Y. However, I believe double-digit revenue growth and more price hikes could be needed until it gets more hits from its vaunted R&D pipeline.
And The Senate Could Await
Senator Bernie Sanders set off the drug price debate when he went on an HCV rant against Gilead (GILD) in 2015. Drug companies’ price gouging later became an issue during the most recent presidential elections. Last year the Senate Special Committee On Aging released a 130 page report titled Sudden Price Spikes In Off-Patent Prescription Drugs. The report was launched by Chairman Susan Collins (R-Maine) and Claire McCaskill (D-Missouri). The report focused on the business practices of four companies – Turing Pharmaceuticals, Retrophin, Inc. (NASDAQ:RTRX), Valeant and Rodelis Therapeutics. These “hedge fund hotels” had been manipulating prices of off-patent drugs, and the senate wanted to combat such practices.
Certain hedge fund hotels did not have the R&D prowess of traditional pharmaceutical companies. They took on the practice of acquiring companies, raising prices and cutting R&D. It begs the question, “What is Celgene’s excuse?” The company has 22 pivotal or phase III programs and billions in capital. The only rationale was to give the illusion of growth in order to justify its share price.
The drug price debate is raging on. The FDA is accelerating generic drug approvals to combat rising prices. Senators are currently questioning Allergan’s (AGN) market monopoly for dry eye drug Restasis. It could be a matter of time before they raise questions over Celgene’s price hikes for Revelimid and Pomalyst. A spotlight on Celgene could cause investors to question whether 20% price hikes are sustainable and whether its 17x EBITDA multiple is warranted.
Celgene’s price hikes for Revlimid and Pomalyst smack of desperation, in my opinion. It could be a matter a time before the market understands Celgene’s near-term growth is dead. CELG is a sell.
Trump And The Global Economy
The second installment of Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?